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Question - Is it time for me to refinance?
Answer - When interest rates fall, a homeowner should definitely call a lender
about refinancing, but he or she should discuss their entire financial situation
and goals before making any final decision. Is your goal to lower your monthly
payment? Consolidate debts? Get cash out for large purchases? Change your interest
deduction expense for your taxes? Ask your lender to provide a couple of refinancing
scenarios for you, showing how your loan term length, monthly payment and your
total interest expense on the loan will change. After looking at these scenarios,
it will be clear whether or not you should spend the money to refinance.
Question - When should I refinance my current mortgage loan?
Answer - It is often said that you should refinance when mortgage rates are
2% lower than the rate you currently have on your loan. Refinancing may be
a viable option even if the interest rate difference is less than 2%. A modest
reduction in the loan rate can still trim your monthly payment. For example,
the monthly payment (excluding taxes & insurance) would be about $770 on a
$100,000 loan at 8.5%. If the rate were lowered to 7.5%, the monthly payment
would be about $700, a savings of $70. The significance of such savings in
any scenario will depend on your income, budget, loan amount and the change
in interest rate. Your trusted lender can help calculate the different scenarios.
Question - Should I refinance if I plan on moving soon?
Answer - Most lenders will charge fees to refinance a loan. If you plan to
stay in the property for less than a couple of years, your monthly savings
may not get a chance to accumulate and recoup these costs. Let's say a lender
charged $1,000 to refinance your loan, but it resulted in a monthly savings
of $50. It would take 20 months (1,000 divided 50) to recoup the initial costs
before you start to realize some savings. Some lenders will charge a slightly
higher than average interest rate on refinance loans, but waive all costs associated
with the loan. The attractiveness of these loans will depend on the interest
rate you are being charged on your current loan.
Question - How much will it cost me to refinance my current home loan?
Answer - In addition to an application fee ($250-350) you will likely have
to pay an origination fee (typically 1% of the loan amount). In many cases
you will have to pay much of the same costs that you had to pay with your current
home loan (title search, title insurance, misc. lender fees, etc.). The sum
of these fees could cost you up to 2-3% of the loan amount. If don't have the
money to pay for associated loan costs, look for lenders that offer 'no-cost'
loans. These loans will charge a slightly higher interest rate, so ask a lender
if it would still make sense to refinance using this type of program.
Question - What are points?
Answer - Points are costs that need to be paid to a lender in order to receive
mortgage financing under specified terms. A point is a percentage of the loan
amount (one point = one percent of the loan). One point on a $100,000 loan
would be $1,000. Discount points are fees that are used to lower the interest
rate on a mortgage loan (you are discounting the interest rate by paying some
of this interest up-front). Lenders may express other loan-related fees in
terms of points. Some lenders may express their costs in terms of basis points
(hundredths of a percent). 100 basis points = 1 point (or 1 percent of the
loan amount).
Question - Should I try to pay as many discount points as possible to lower
my loan's interest rate?
Answer - If you plan on staying in the property for at least a few years, paying
discount points to lower the loan's interest rate can be a good way to lower
your required monthly loan payment (and possibly increase the loan amount that
you can afford to borrow). If you only plan to stay in the property for a year
or two, your monthly savings may not be enough to recoup the cost of the discount
points that you paid up-front. Ask your lender how long it would take for your
monthly savings to recoup the costs of the discount points.
Question - What does it mean to lock the interest rate on a mortgage loan?
Answer - Due to the nature of interest rate movements, mortgage rates can change
dramatically from the day you apply for a mortgage loan to the day you close
the transaction. If interest rates rise sharply during the application process,
it could make a borrower's mortgage payment larger than he/she previously thought.
To protect against this uncertainty, a lender can allow the borrower to 'lock-in'
the loan's interest rate, guaranteeing the borrower the prevailing loan rate
for a specified period of time (often 30-60 days). A lender may or may not
charge a fee for this service.
Question - Should I lock-in my loan rate when I apply for a mortgage loan?
Answer - No one knows for sure how interest rates will move at any given time,
but your lender may be able to give you an estimate of where it thinks mortgage
rates are headed. If interest rates are expected to be volatile in the near
future, you may want to consider locking your interest rate if rising rates
will no longer allow you to qualify for the loan. If your budget can handle
a higher loan payment or if the lenders lock fee seems excessive for your means,
you might want to consider allowing the interest rate to 'float' until the
loan closing.
Question - I've had credit problems in the past. How does this impact my
chances of getting a home loan?
Answer - Obtaining a home loan is possible even with extremely poor credit.
If you have had credit problems in the past, a lender will consider you to
be a risky borrower to lend to. To compensate for this added risk, the lender
will charge you a higher interest rate and usually expect you to pay a higher
down payment on your home purchase (typically 20-50% down). The worse your
credit is, the more you can expect to pay for an interest rate and a down payment.
Not all lenders choose to lend to risky borrowers, so you may have to contact
several before finding one that will.
Question - I've only been late a couple of times on my credit card bills.
Does this mean I will have to pay an extremely high interest rate?
Answer - Not necessarily. If you have been late less than three times in the
past year, and the payments were no more than 30 days late, you probably have
a pretty good chance at getting a home loan at a competitive interest rate.
Lender guidelines will vary, but most lenders will excuse a couple of minor
'late-pays' as long as the borrower can provide a reasonable excuse explaining
them (i.e. job transition, illness). If the late-pays were 60+ days late and
cannot be explained, you may have to settle for a higher interest rate.
Question - How can I tell who has the best deal on financing?
Answer - When comparison shopping among lenders, remember that a lender can
structure financing for a borrower several different ways. A lender can charge
higher fees and offer a low interest rate while another may charge a slightly
higher interest rate with lower fees. In order to make an 'apples to apples'
comparison between lenders, ask each lender what their interest rate is for
a zero discount point loan (based on a 30 or 60 day lock period). Then ask
each lender what they charge for an origination fee, as well as any other fees
they typically charge for a loan, (i.e. broker, processing, underwriting).
A reputable lender will not hesitate in answering these questions.
Question - Should I choose the lender with the lowest interest rate and
costs?
Answer - There are primarily two things to consider when choosing one lender
over another: the quality of service being provided and the cost of services
provided. Quality of service is especially important to those who have never
purchased a home. First-time home buyers will likely have many questions regarding
the financing process and available loan options. When comparing lenders, ask
each lender several questions before you fill out any loan application. A good
lender should be able to get you through the financing process leaving you
confident that you made a sound financial decision. If after a few questions
you do not feel comfortable with the lender, simply call someone else.
© 2001 LowRatesFinancing Inc.
Note: This article was submitted by a second party and the contents are subject to
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